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Bruce.Lipsky@jacksonville.com The task force met on March 6 and urged the city to pump more money into the fund. It also called for a "shared sacrifice" approach, urging cuts in benefits for new hires.

Bruce.Lipsky@Jacksonville.com Bobby Deal, the chairman for the board of trustees for the Police and Fire Pension Fund, speaks at the pension task force meeting.

Bruce.Lipsky@jacksonville.com Task force chair Bill Scheu listens to comments from a task force member during a pension reform meeting at City Hall on March 6.

--Don.Burk@jacksonville.com--06/16/11--Q & A with Jacksonville Mayor John Peyton, just a week or so before he leaves office. At City Hall, in Jacksonville, Florida, on Thursday, June 16, 2011. (Don Burk/ The Florida Times-Union).

Provided by University of North Florida John Delaney, president of the University of North Florida, is among the 2014 speakers at the Generation W women's conference in Jacksonville.2013

Bobby.King@jacksonville.com - October 2, 2012 - Jacksonville Mayor Alvin Brown introduced the ribbon cutting ceremony and opening of 'New Town Success Park,' at the corner of Pierce and Dot Streets, three blocks south of Edward Waters College.(Times-Union - Bobby King)

The $1.65 billion bill Jacksonville owes its Police and Fire Pension Fund took years to pile up, but like a tsunami that starts in the ocean and builds its way to the shore, the pension debt crashed like a wave on City Hall.

How to pay that enormous debt is the single biggest financial question facing City Hall because the ever-rising cost of pension payments is crowding out other city services — police on the beat, library hours, park improvements, downtown revitalization.

To understand the size of the pension debt, consider that the Better Jacksonville Plan, approved by voters in 2000 with a half-cent sales tax, ushered in $2.2 billion of construction on dozens of roads and civic buildings — the biggest burst of spending in city history.

The pension debt has grown so large that a task force called last month for a voter referendum on enacting another half-cent sales tax hike.

“It’s pay me now or pay me later,” said task force Chairman Bill Scheu, arguing the city saves money in the long run by biting the bullet.

City leaders have debated pension reform since at least 2008 when Florida TaxWatch, a nonprofit government watchdog group, raised alarms because the city owed about $798 million at the time. The debt has doubled since then.

How did that happen?

Two prior attempts at pension reform by mayors John Peyton and Alvin Brown fell short, criticized as not going far enough in cutting benefits and restoring stability to the fund.

As a result, the city has made no reductions in pension benefits.

But the Police and Fire Pension Fund made significant changes in the assumptions it uses to calculate the cost of making good on those pension promises.

After assuming for years that it would generate annual investment returns of 8.5 percent, the pension fund decided in 2012 to scale back its expected returns to 7.75 percent, and last year, it dropped that again to 7 percent.

The revised assumptions are more fiscally conservative. But when the fund assumes its portfolio will spin off lower investment returns, taxpayers must shoulder more of the financial load.

In addition, the fund replaced its outdated models for predicting when police and firefighters would retire, and how long they would live in retirement. Those updates in 2009 and 2012 created a more realistic assessment of the real-world cost of pension promises.

Taken together, the changes contributed to an explosion in the city’s annual cost of paying for pension — a cost that state law requires the city to make.

FUND WASN’T ALWAYS A MILLSTONE

The Police and Fire Pension Fund wasn’t always a weight around the city’s neck.

In 2000, the fund had $815 million in assets compared to a pension liability of $940 million. The pension liability is what the fund is obligated to pay in pensions over a 30-year period, based on benefits earned to date by active and retired police and firefighters.

In other words, the fund’s assets at that time were able to cover 87 percent of the pension obligations. The remaining 13 percent — amounting to $125 million — is called the “unfunded liability.”

That is the debt the city owes, similar to a mortgage that a homeowner must pay down over a period of years. To make sure Florida cities don’t shirk their obligation to pay down that debt each year, state law requires them to pay whatever an actuarial report says is the minimum annual payment to catch up.

Even though the unfunded liability started to grow in 2001, the city continued its years-long pursuit of cutting property taxes. That made it more difficult to make the annual pension payments, but the city tapped pension reserve accounts to help pay those contributions.

From 2000 through 2006, the city paid $120 million in cash contributions from its general fund, and used $44 million from its pension reserve account, draining it dry.

Meanwhile, the fund’s investment portfolio got walloped by the plummeting stock market from 2000 to 2002 and even more drastically in 2008. The fund’s assets recovered and grew over time, but not nearly fast enough to keep pace with the rising pension liability.

As of September 2013, the fund had about $1.23 billion in assets compared to $2.88 billion in liabilities, meaning it was 43 percent funded, according to a report issued in February. The remaining $1.65 billion was the debt.

The growth in pension liabilities reflects the growing number of retirees supported by the pension fund. Annually, they get an automatic 3 percent, compounded cost-of-living adjustment for their pensions, which means their pensions gained value faster than the inflation rate.

On the positive side, the pension fund’s assets have posted strong growth, fueled by the city pouring more money into the fund and resurgent investments. As of March, the fund’s assets passed the $1.5 billion mark, and if that trend continues, the next “fiscal snapshot” could show a decline in the unfunded liability.

“We are headed in the right direction,” said pension fund board Chairman Bobby Deal.

PAYING DOWN THE DEBT FASTER

The pension reform task force urges the city to pump even more money into the fund, likening it to the strategy of paying down credit card debt faster.

Instead of contributing $153 million next time — the minimum amount required by law — the city would pay $200 million and then keep paying $200 million annually for 12 more years. By front-loading payments, the fund would have more money to invest, so its assets would grow more quickly.

The task force said the city should raise taxes to get the additional money.

First, City Council would increase the city’s property tax rate of 11.44 mills by another 1.5 mills. (A mill is $1 in taxes for every $1,000 in taxable property value). If enacted by City Council, it would be the city’s highest tax rate since the early 1970s.

City Council then would call a referendum in November for voters to decide if they want to replace the property tax increase with a half-cent sales tax hike.

If voters approved a sales tax increase, it would bring the total state-city sales tax in Duval County to 7.5 cents, tying it with nine other Florida counties for the state’s highest.

The task force’s “shared sacrifice” approach also urges cuts in pension benefits for new hires and active police and firefighters. The city will save $1.8 billion to $3.4 billion over 30 years, said Scheu, the head of the task force.

“That’s a good trade-off,” Scheu said. “That means down the road they don’t have a $400 million spike in the city’s budget. That means down the road they’re going to have libraries, they’re going to have young people coming to Jacksonville, they’re going to have a thriving community. Without it, we’ll be struggling over this and wondering whose budget is going to be cut.”

Backers of a tax increase face an uphill fight.

Brown, who created the task force, opposed its recommendation for higher taxes. He is pushing for pension benefit cuts and wants JEA, the city-owned utility, to pay $560 million over 14 years for the pension paydown. JEA is doing its own review of his proposal.

City Council President Bill Gulliford says he’d support a tax increase, but only if “shared sacrifice” applies to benefit cuts for current police and firefighters, rather than just new hires.

DOING NOTHING EXACERBATES PROBLEM

If nothing is changed, soaring pension costs will keep absorbing money City Hall could otherwise spend on services that shape the city’s quality of life.

For instance, the number of retirees in the fund has risen by 135 over the past four years, hitting 1,618 through last September.

In that same period, the number of on-duty police and firefighters fell from 2,981 to 2,692, a drop-off of 289.

The on-duty ranks included 542 police and firefighters in the deferred retirement option program, which lets them accumulate pension payments while also drawing salaries for up to five years. As they move through DROP, the number of retirees will grow.

Last year, City Council approved a 1.4 mill property tax rate increase that raised around $60 million to prevent the layoffs of 400 police officers and the closure of fire stations, libraries and park facilities.

The tax increase came as the city’s contribution to the Police and Fire Pension Fund doubled over a three-year period, hitting $144 million. A smaller increase is in store for next year’s budget — the fund says the city needs to pay $153 million.

Still, it’s a big number, and most of it — $110 million — is based on paying down the multiyear debt load.

The rest will go to pay the tab for benefits police and firefighters earned over the past year and some fund expenses — costs the city would pay even if the unfunded liability were zero.

City Councilman Greg Anderson said when he won election in 2011, he knew going in pension reform would be the city’s most pressing financial issue, but accomplishing it has been far harder than he expected.

He’s spent long hours serving on the pension reform task force and confronted the impact of pension costs while serving as chairman of the council’s Finance Committee. Over and over again, he said he’s thought of how the surging pension expense is costing the city opportunities to invest in downtown, parks, and neighborhood-based public works.

“I’m very focused on coming up with a solution that will allow the community to be all that it can be,” he said. “The unfunded liability is keeping Jacksonville from being all that it can be.”